CARES Act Summary
The unprecedented coronavirus (COVID-19) continues to cause chaos not only in hospitals across the country, but also on entire markets and industries. This has meant that many businesses must now face previously unthinkable challenged — for example, their entire business being ordered by the government to halt operations. In order to help serve our clients and Ohioians as a whole, Gugliotta & Gugliotta has put together a team and has created many topic-specific client resources (see Gugliotta & Gugliotta’s COVID-19 Emergency Resource Headquarters). We understand that these are not only challenging times, but also confusing times as well. For that end, we are prepared to help our clients’ legal and business needs resulting from the coronavirus COVID-19 pandemic, no matter which industry our clients may hail from — manufacturing, technology, hospitality, travel, entertainment, dining, health care, fashion, apparel, consumer goods, sports, and more.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
In a rare and much-needed display of bi-partisanship, the Senate passed the CARES ACT unanimously (96–0) on March 25, 2020. The CARES Act represents the third—and by far the largest, with a price tag of $2.5 trillion— phase of the federal government’s coronavirus-related economic relief measures. This CARES Act provides not only businesses but also individuals and hospitals with much-needed, emergency economic relief. The House of Representatives passed the CARES Act by a voice vote on March 27, 2020, and President Trump signed the bill into law later that day.
We will be posting more updates, analysis, and information, as it becomes available, about the CARES Act on our COVID-19 Emergency Resource Headquarters. Please check back frequency for updates. Gugliotta & Gugliotta, LPA is available to assist in interpreting the CARES Act for your business, and we are happy to help you find ways to claim and use available funding for your company.
The CARES Act 101
Below, find some of the most important aspects of the CARES Act:
The U.S. Government has created a $349 billion loan program for small businesses. This includes 501(c)(3) non-profits and physician practices. Importantly, these loans can be forgiven through various federal processes which act to ensure companies retain their employees during these uncertain times.
Individuals, businesses, and hospitals will receive stimulus to directly address the widespread economic havoc caused by the COVID-19 pandemic.
$500 billion in funds is allocated for assisting businesses, state governments, and local municipalities. Of that, no more than $46 billion is set aside to assist airlines, air cargo carriers, and businesses of paramount importance to the United States’ national security. This means that the remaining $454 billion is available to assist eligible companies, state governments, and local municipalities.
The Treasury Secretary now has authority to issue loans or make loan guarantees to state governments, local municipalities, and eligible businesses. Additionally, various regulations imposed in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Economic Stabilization Act of 2008, and more have been relaxed.
$130 billion in funds has been set aside exclusively for the health care industry. This includes for assisting in the supply of drug and medical device shortages. additionally the CARES Act greatly expands the role of Telehealth services in Medicare, even if such services are unrelated to the COVID-19 pandemic.
The Federal government has expanded employment insurance eligibility, providing eligible individuals with an additional $600 per week on top of the individual’s state-determined unemployment amount.
Checks of $1,200 will be sent to Americans making no more than $75,000. In the case of joint returns, checks will be sent to joint filers making $150,000 or less, and heads of households making $112,500 or less. Additionally, payments of $500 per “child” will be paid “as rapidly as possible.”
The CARES Act expands the Defense Production Act, which now allows for a two year window for government to correct shortfalls in resources, without regard to the expense limit of $50 million.
A Quick Summary of the CARES Act
Division A — Keeping American Workers Paid and Employed, Healthcare System Enhancements, and Economic Stabilization
Title I — Keeping American Workers Paid and Employed Act
Paycheck Protection Program.
$349 billion is set aside to cover a period from 2/15/2020—6/30/2020 and greatly expands the SBA loan eligibility requirements. This loan program now allows businesses which have suffered as a result of the COVID-19 pandemic to borrow money for a variety of eligible costs related to maintaining employment and benefits. These include payrolls cost, continuance of health care benefits for employees, employee salaries for employees making under $100,000 per year, mortgage interest and rent obligations, utility payments, and interest on debt which was incurred prior to the covered period.
Moreover, this greatly expands the number of businesses (including non-profits) which are eligible for SBA loans, and it raises the maximum amount for all loans by 2.5 times the average total monthly payroll cost, or up to $10 million. The interest rates on these loans will be set at 0.5%.
Eligible companies include those that employ 500 people or fewer. However, companies with a larger workforce may be eligible as well, depending upon industry-standard workforce sizes. Certain companies in the Accommodation and Food Services Industry (NAICS Code 72) may also be eligible, if they employ no more than 500 employees per physical location. Generally, the number of employees includes all affiliate firms.
The affiliation rules of 13 C.F.R. §121.103 are waived for any Accommodation and Food Services Industry employer with fewer than 500 employees, certain franchise businesses, as well as small businesses which receive SBICA financing. When determining eligibility for these loans, affiliation rules otherwise apply.
Waives the requires of other available credit, personal guaranty, and collateral.
Lenders must determine whether a business was operational on February 15, 2020 and had employees for whom the company paid both payroll taxes and salaries, or paid independent contractors.
Importantly, all or a portion of the loans may be forgivable, and debt service payments can be defers for 1 year.
Entrepreneurial Development
The CARES Act provides funding in order to educate both small businesses and their employees about the federal resources that are available during this tumultuous period of time, the hazards of the COVID-19 illness, as well as best practices for working remotely.
State Trade Expansion Program
Federal grants are now available to support State Trade Extension Program (STEP) in Fiscal Years 2018 and 2019 to remain available for use through the end of Fiscal Year 2021.
Waiver of Matching Funds Requirement under the Women’s Business Center Program
The non-federal match requirement for Women’s Business Centers has been suspended for a 3 month window.
LOAN FORGIVENESS
FOR MANY, THIS IS A BIG ASPECT
Borrowers under the Paycheck Protection Program are eligible for loan forgiveness equal to the amount spent by the borrow during an 8-week period after the origination date on the following types of expenses only: (1) rent; (2) payroll costs for workers making less than $100,000 annually; (3) utility payments; and, (4) interest on a mortgage. Keep in mind that the amount forgive cannot exceed the principal amount of the loan.
Employers participating in this program are incentivized to retain their employees, since the amount of the loan which can be forgive is proportional to any reduction in employees retained compared to the previous year.
In an effort to encourage employers to re-hire any employees who may have already been laid off because of the pandemic, borrowers of this program who re-hire workers who they previously laid off will not be penalized for having a reduced payrolls at the beginning of the period.
Minority Business Development Agency
The Department of Commerce, via the Minority Business Development Agency, is empowered to issue grants to minority business centers and minority chambers of commerce in order to better provide education, training, and advisement related to the availability and process of obtaining federal resources.
United States Treasury Program Management Authority
The U.S. Treasury, in consultation with the SBA and the Farm Credit Association Chairman, will establish a criteria in order to let other lenders participate in the Paycheck Protection Program. However, participation in the program as a lender cannot threatened the safety and soundness of the lender, as relevant federal banking agencies may determine in consultation.
Emergency Economic Injury Disaster Loans (otherwise called “EIDLs”)
The covered period begins on January 21, 2020 and ends December 31, 2020.
During the covered period, EIDL eligibility has been expanded to include any business with less than 501 employees which operates as a sole proprietorship or an independent contractor, as well as any cooperative, ESOP, and tribal small business concern with fewer than 501 employees. Again, the number of employees is determined in a pool with all affiliates.
EIDLs can be approved exclusively on the bases of: (1) Applicant’s credit score; (2) by use of alternate methods to determine the applicant’s ability to repay the loan.
Applicants can request up to $10,000 advanced within 3 days after the Administrator received the application, subject to certain verification that the applicant is indeed eligible for this program. This advanced amount can be used for any allowable purposes listed in §7(b)(1) of the Small Business Act, and is not subject to repayment (even if the loan request is ultimately denied!).
Waives the following requirements: (1) personal guarantees for loans up to $200,000; (2) credit available elsewhere test; and, (3) that the applicant have been operational for at least a year (however, the applicant must have been operational on January 31, 2020).
Subsidy for Certain Loan Payments
For loans under Small Business Act §7(a), Small Business Investment Act Title V, and for loans made by an intermediary §7(m) loans or grants, the Administrator will pay the principal, interest, and fees owed for loans in regular servicing status for any such loans, whether on deferment or not, which were made before the CARE Act was enacted and the following 6-month period, as well as for any such loans that were made between March 27, 2020 and September 27, 2020.
However, this doesn’t apply to Payroll Protection loans or EIDL loans which have separate subsidy and repayment requirements.
Payments cannot be made more than 30 days from when the first payment is due, and will be applied in a way that the borrower is relieve of any obligation to pay that amount. The Administration will coordinate with relevant banking agencies in an effort to request that lenders not be subject to requirements to increase reserves on the basis of such payments.
The Administrator will waive limits on the maximum loan maturities for loans given deferral and extended maturity during the 1-year period from March 27, 2020–March 27, 2021. The Administrator will extend lender site visit requirement timelines to whatever the pandemic situation requires, to within 60 days of a non-default adverse event, and 90 days of a default.
Bankruptcy
Title 11, §1182(1) is amended in such a way that “debtor” is defined as people engaged in commercial or business activities and their affiliates (however, this does not include anyone who primarily owns single asset real estate) that have aggregate, contingent, liquidated secured and unsecured debts (which exist at the date of petition file or the order for relief) of $7.5 million or less (this doesn’t include debts owed to affiliates and insiders), half or more of which were derived from those activities.
National Emergency Act payments for COVID-19 by the President are excluded from “current monthly income” and “disposable income” when weighing the courts’ power to approve debtor plans rejected by trustees or claim holders.
Debtors who has experienced additional material financial hardship stemming directly from COVID-19
Title II
Subtitle B: Unemployment Insurance
Eligibility
Expands the scope of people who are eligible for unemployment insurance to include those furloughed or unemployed as a direct result of COVID-19, self-employed or gig workers, and those who have already exhausted their preexisting state and federal unemployment benefits.
Only people expressly excluded from eligibility are those that can telework with pay, and those who receive paid sick leave or other paid benefits (even if they would otherwise satisfy all eligibility requirements under this new law)
Administration of Benefits
Benefits will be administered by each state, and are contingent upon the State’s written agreement with the Labor Secretary to provide these specific benefits. States that do enter into this agreement will be reimbursed in whole or in part for the cost of the benefits, plus all administrative expenses.
Types of Benefits
An extra $600 per week, in addition to the amount customarily available for unemployment under state law, will be available. This apply to unemployment payments from from March 27, 2020 through July 31, 2020.
States can agree to provide COVID-19 emergency unemployment compensation to individuals who have either exhausted all of their preexisting available benefits , or to those who are otherwise not eligible for benefits under existing state and federal law. Individuals must be able and available to work and actively seek work, unless they cannot due to COVID0-19 illness, quarantine, or movement restriction.
States can opt to waive the waiting period for benefits, so individuals do not see a gap in their income.
Federal government to temporarily fund short-time compensation under states’ existing plans. States that do not have short-time compensation plans yet may agree to implement such a plan, provided that employers who enter into short-time compensation plans must be required to pay half of the short-time compensation under the plan to the respective state.
Time Period for the Expanded Benefits
These expanded unemployment insurance benefits will be available to covered individuals from January 27, 2020 through December 31, 2020, including any waiting periods under applicable state laws.
Generally, the total benefit cannot expend beyond 39 weeks (this includes unemployment benefits for extended benefits received under existing state or federal laws)
The additional $600 per week benefit will be available through July 30, 2020.
Protections Against Fraud and Overpayment
If a person commits fraud or misrepresentation in an effort to obtain payments to which that person is not eligible, this will result in ineligibility for any other unemployment compensation benefits under the new law, in addition to criminal prosecution.
Overpayments may be accounted for by state agencies.
Treatment of Social Security
Additional unemployment benefits provided will not be considered “income” for the purposes of Medicaid and CHIP
Subtitle B: Rebates and Misc. Individual Provisions
Tax Credits
Eligible Individual taxpayers can benefit from tax credits equal to the sum of $1,200 for single filers or $2,400 for joint filers. Additionally, eligible individual taxpayers will received $500 per qualifying child.
These tax credits will be decreased by 5% of the amount by which the eligible taxpayer’s adjusted gross income exceeds $150,000 for joint-filers and $112,500 for heads of household, and $75,000 for all other types of filers.
For example, this tax credit will be entirely unavailable for joint filers earning $198,000 who have no children.
Tax Treatments of “Coronavirus-Related Distributions”
The CARES Act generally defines a “coronavirus-related distribution” as any distributed from an eligible retirement savings plan made in the year 2020, to an individual who is diagnosed with COVID-19, to an individual whose spouse or dependent is diagnosed with COVID-19, or to an individual who experiences financial hardships as a result of being quarantined, furloughed, laid off, saw a reduction in hours, or any other factor determined by the Secretary of the Treasury during the COVID-19 pandemic.
Qualified employer retirement savings plans can allow individuals who elect to receive a “coronavirus-related distribution”, which will not be subject to traditional 10% tax penalty imposed under the tax laws for early withdrawals.
Unless the aggregate amount of these distributions from all plans maintained by the employer (and any member of any “controlled group” which includes the employer” to such an individual is greater than $100,000
Coronavirus-related distributions made from both eligible employer sponsored retirement savings plans and IRAs are exempt from the 10% early distribution penalty tax
These distributions are, however, subject to regular income tax, although the individual can choose to spread these tax payments out over the course of 3 years.
Repayments of Coronavirus-related distributions
Any person who receives a coronavirus-related distribution can, generally speaking and at any time within 3 years after the distribution was received, make 1 or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement savings plan. These repayments will, to the extent of the amount of the contribution, be treated as having received the coronavirus-related distribution in an eligible rollover distribution, and will be treated as having transfers the amount to the eligible retirement account in a direct trustee to trustee transfer within 60 days of the distribution.
Effects one the Limits on Loans from Qualified Employer Plans
The limitation on loans from any qualified employer plan made to qualified individuals during the 180 day period beginning on March 27, 2020 will be increased from $50,000 to $100,000. Additionally, if the due date of any loan occurs between March 27, 2020 and December 31, 2020, the due date will be delayed for 1 full year.
Required Minimum Distribution Threshold
Temporary waiver of the minimum distribution requirements for the following types of accounts: (1) most defined contribution plans (for example, 401(k) plans), (2) §457(b) deferred compensation plans that are maintained by an eligible employer, or (3) IRAs. This applies for all required minimum distributions that would have otherwise been required in 2020.
Tax Treatment for Charitable Donations
Allow taxpayers to take above-line tax deductions for charitable contributions of up to $300 for the 2020 tax year.
Plus, except for certain exclusions, the percentage and surplus carryover restrictions on charitable and other qualified contributions are ignored
Subtitle C: Business Provisions
Employee Retention Credit for Employer Subject to Closure Due to COVID-19
Eligible employers receive a credit on applicable employment taxes for each calendar quarter, in an amount of 50% of each employee’s qualified wages. The amount of qualified wages taken into account for each eligible employee cannot exceed $10,000 per calendar quarter. Further, this tax credit cannot exceed the applicable employment taxes owed by the employer for that calendar quarter. This credit will not be applicable when the employer is taking advantage of a small business interruption loan.
An “eligible employer” is defined as any employer who (1) was operating during calendar year 2020, and (2) with respect to any calendar quarter for the operation was fully or partially suspended due to government order resulting from COVID-19, or the calendar quarter is within the period beginning on the calendar quarter after December 31, 2019 for which gross receipts for the calendar quarter are less than 50% of the gross receipts for the same
Delaying Payment of Employer Payroll Tax
Allow most employers to defer paying employment tax share from March 27, 2020 through December 31, 2020. Half of this amount will be due on December 31, 2021, and the other half will be due by December 31, 2022.
Modifications to Net Operating Losses (otherwise known as “NOL”)
Generally, there is not a temporary repeal of taxable income limitation. This includes in the case of a taxable year beginning before January 1, 2021, the aggregate of the NOL carryovers to such year, plus the NOL carry backs to such year. This also includes in the case of a taxable year beginning after December 31, 2020, the sum of the aggregate amount of NOLs arising in taxable years beginning before January 1, 2018 carried to such taxable year, plus the lesser of the aggregate amount of NOLs beginning after December 31, 2017, carried to such taxable year, or 80% of the excess of certain taxable income.
For cases where the NOL arises in a taxable year beginning after December 31, 2017 and before January 1, 2021, the NOL will be a net operating loss carry back to each of the 5 taxable years preceding the taxable year of such loss, and certain rules which apply specifically to “real estate investment trusts” and life insurance companies.
Changes to Limitation on Losses for Non-Corporate Taxpayers
For any taxpayer which is not a corporation:
For a taxable year beginning after December 31, 2017 and before January 1, 2026, subsection (j), which related to a limitation on excess farm losses for certain taxpayers, does not apply, and
For any taxable year beginning after December 31, 2020 and before January 1, 2026, any excess business loss of the taxpayer for the taxable year will not be allowed.
With respect to the treatment of capital gains and losses and how to treat them when calculating “excess business losses:
Deductions for losses from the sales out exchanges of capital assets will not be considered
The amount of gains from sales or exchanges of capital assets taken into account cannot be larger than the smaller of: (1) the capital gain net income, determined by taking into account only gains and losses attributable to a trade or business, or (2) the capital gain net income.
These amendments apply to taxable years beginning after December 31, 2017.
Changes to Corporations’ Credit for Prior Year Minimum Tax Liability
For background, the corporate alternative minimum tax (“AMT”) was repealed as part of the Tax Cuts and Jobs Act. However, corporate AMT credits were made available as refundable credits over several years ending in 2021.
This new law accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 pandemic.
Changes to Limitation on Business Interest
Temporary increase in the amount of interest expense businesses can deduct on their tax returns. Increase the 30% limitation to 50% of taxable income (with adjustments) for 2019 and 2020. As businesses look to survive the current crisis, this can allow them to increase liquidity while reducing cost of capital, in order for them to continue operations and keep employees employed and on payroll.
Qualified Improvement Property
Allows businesses (especially in hospitality industry) to immediate write off costs associated with improving facilities, rather than having to depreciate those improvements over the 29-year life of a building.
This increases companies’ access to cash flow by allowing them to amend a prior year’s return, and also incentivized them to invest in improvements to help the country recover from the current crisis.
Temporary Exception from Excise Tax for Alcohol Used to Product Hand Sanitizer
For all distilled spirits removed after 12/31/2019 and before 1/1/2021, these spirits will be tax-free for use in or contained in hand sanitizer produced and distributed in a manner consistent with FDA guidelines related to the COVID-19 outbreak.
Small Business Disaster Relief Loans
The Coronavirus Aid, Relief, and Economic Security Act (“CARES ACT”) was signed into law by the President on March 27, 2020. The CARES Act provides many important emergency economic relief programs for American employers, employees, and hospitals, including the Paycheck Protection Program (“PPP”), a fund of $349 billion allocated to prevent job losses and small business devastation due to the losses caused by COVID-19 pandemic and the necessary governmental responses.
This new PPP loan program is available to many types of eligible employers, including but not limited to sole proprietorships, non-profits, veterans’ organizations, and tribal business concerns, and seeks to provide forgivable loans in an effort to cover payroll expenses and other basic and mandatory operational expenses. The CARES Act doesn’t stop there, also expanding the Economic Injury Disaster Loan (“EIDL”) Program with an additional $10 billion in funding.
When planning a strategy to weather this COVID-19 pandemic, businesses like yours should understand both programs, in addition to all of the other various financial reliefs that may be available under the CARES Act. Given the complex nature of the qualification criterion, the differing programs, and the various incentives codified by the CARES Act, each business’s application options should be evaluated separately and individually, taking into consideration the relevant industry, legal requirements, financial considerations, and other obligations during this unprecedented time in world history.
The Paycheck Protection Program (“PPP”)
Loans provided to employers under the PPP are fully guaranteed by the federal government, and will become available to small businesses beginning on April 3, 2020 through the PPP Application. These loans are intended to allow employers to maintain their pre-pandemic payroll figures, and allow for partial or full loan forgiveness, provided that the funds are used for eligible purposes (more on this below). These loans will be available through June 30, 2020 in order to help eligible employers maintain the following expenses:
Payroll
Health care benefits
Health care insurance premiums
Rent and utility expenses
Employee compensation
Mortgage interest obligations
Interest on debt which occurred prior to the loan
According to updated SBA guidance, at least 75% of the forgiven amount must have been used for payroll.
There is, however, a maximum principal amount that each employer is limited to taking. The maximum amount of a PP loan will be $10 million, 2.5 times the average 2018 payroll costs (minus any compensation paid to an employee in excess of $100,000/year, or any amounts paid to an independent contractor or sole proprietor over $100,000/year), whichever of the two is lower. Payroll costs, for the purposes of PPP Loans, include salaries/wages/tips which are capped at $100,000 annualized for each employee, paid time off, sick and family leave pay, allowance for separation or dismissal, payment of retirement benefits, payments of health insurance benefits and premiums, and all state and local taxes assessed on the employees’ compensation. If you are a sole proprietor or an independent contractor, wages, commissions, income, or net earning from self employment are capped at $100,000 annualized for each employee. Unlike many SBA loans, these PPP loans are unsecured loans which require absolutely no collateral, no personal guarantees for repayment, and no need to show that the employer is out of options with no other credit available elsewhere. To the extent that a PPP loan is ultimately not forgiven in full, these loans have a 2 year term and an interest rate of 1.0%. These loans will be made available through lenders approved by the SBA and will include a 6 month deferment on payment of the principal, interest, and fees.
Small business employers will be able to apply through any existing SBA 7(a) lender, or through any participating federally-insured depository institution, federally insured credit union, or Farm Credit System institution, all of which were set to begin processing applications on April 3, 2020, but it appears that many of the largest lenders have been unable to begin processing applications by that date.
LOAN FORGIVENESS
A PPP borrower is eligible for loan forgiveness on amount spent during an 8-week period after the origination date on rent, defined payroll costs, mortgage interest, and utilities (all subject to proper documentation). The amount forgiven cannot exceed the principal amount of the loan. However, the amount ultimately forgiven will decrease if the borrower reduces either the size of its workforce or the salaries/wages of its employees making less than $100,000 per year during that 8-week window after the loan’s origination date. This deduction will not apply to the extent that the borrower restores their workforce count and salaries/wages by June 30, 2020. Further, pursuant to additional federal guidance, the government has decided that to be eligible for loan forgiveness, the borrower must have spent at least 75% of the PPP loan amount on payroll expenses.
ELIGIBILITY
Employers are eligible for a PPP loan if they are either a small business concern under SBA regulations, or a business concern, nonprofit organization, veterans’ organization, or Tribal business concern that employs fewer than 501 employees (alternatively, the number of employees in a size standard to the application industry, which could be up to 1500 employees, depending on industry). If an employer is part of the Accommodation and Food Services Industry and has more than 500 employees, it can still take advantage of PPP loans if it can show that it has fewer than 501 employees per location.
Of particular note is that the CARES Act waives the SBA’s usual affiliation rules for determining PPP eligibility among certain categories of employers, including businesses in the Accommodation and Food Services Industry, those operating as a franchise and which are assigned a franchise ID code in the SBA Franchise Directory, and any employer that receives any sort of financial assistance through a licensed Small Business Investment Company. Due to this limited waiver, and subject to further guidance that we expect from the SBA in the coming days or weeks, the remainder of eligible employers are seemingly subject to the SBA’s affiliation rules, which would act to aggregate the number of an applicant’s full-time and part-time employees with those of their domestic and foreign affiliates. Attempting to identify which companies may qualify as an “affiliate” is a fact-specific and intense inquiry, but in general terms any ability to control a business concern leans towards an affiliate relationship. Additional guidance expected from the SBA should clarify how the SBA will apply its affiliation rules to applicants of PPP loans.
Finally, to be eligible an employer needs to have been operating on February 15, 2020 and must have had employees being paid salaries and payroll taxes or independent contractors as of February 15, 2020. When applying for a PPP loan, the applicant must certify that the uncertain nature of these current economic conditions makes the loan request necessary to effectuate on-going operations, and acknowledge that the funds will be used to retain the employer’s workforce and maintain payroll levels and make mortgage/lease and utility payments.
In order to apply for a PPP loan, the applicant will need to submit documentation to the lender in order to establish eligibility. For example, this can include payroll processor records, payroll tax filings, for Form 1099-MISC, or income and expenses from a sole proprietorship. If you do not have any such documents in your possession, you will have to provide the lender with other supporting documentation necessary to show a qualifying payroll amount, such as bank records.
INELIGIBILITY
Some factors will make you ineligible, even if you otherwise meet the eligibility requirements described above. For example, if you are engaged in illegal activity under federal, state, or local law you will be ineligible for a PPP loan. If you are a household employer—somebody who employs household employees such as housekeepers and nannies—you will be ineligible for a PPP loan. If any owner with more than 20% interest in the company is incarcerated, on probation, or parole; presently subject to an indictment, criminal information, arraignment, or other means by which federal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last 5 years, you will be ineligible. If you, or any business owned for control by you or your owners, has ever obtained a direct or guaranteed SBA loan, or a loan from any other federal agency, and that loan is currently delinquent or you have defaulted on it within the last 7 years and caused a loss to the government, you will be ineligible for a PPP loan.
INDEPENDENT CONTRACTORS AND SOLE PROPRIETORS
When calculating an employer’s payroll cost for independent contractors and/or sole proprietorships, payroll costs consist of wages, commissions, income, or net earning from self-employment or similar compensation.
For companies determining their employee count for the purpose of a PPP loan, independent contractors do not count, since independent contractors have the ability to apply for a PPP loan by themselves. Thus, they will not count as an employee, for the purposes of a borrower’s PPP loan calculation.
AGENT/ATTORNEY ROLE AND FEES
Pursuant to federal guidance, an agent is any representative who assists a borrower (such an an attorney, consultant, accountant, or other authorized representative acting on the borrower’s behalf before the SBA). Agent fees are subject to a maximum amount imposed by the government. Importantly, if you are a borrower, the agent cannot collect fees associated with the application preparation and/or referral to a lender from you directly. Instead, these fees are paid by the lending institution, out of the fees paid to the lender by the government. Agent fees for preparing an application (including referral to the lender) cannot exceed: 1.0% of the total loan amount for loans up to $350,000; 0.50% of the total loan amount for loans between $350,000.01 and $2,000,000; or 0.25% of the total loan amount for loans in excess of $2 million. It appears that agents are free to collect additional fees directly from the borrower for services outside of preparing a PPP application (such as consultation, loan forgiveness compliance advise, and work preformed to seek loan forgiveness). However, PPP loan proceeds cannot be used to pay these types of additional fees.
Economic Injury Disaster Loan (“EIDL”) Program
Another option for small business employers in these uncertain market conditions is the SBA’s EIDL Program, which was further expanded by the CARES Act and provides longer-term loans while maintaining favorable terms for borrowers. Companies in all 50 states, D.C., and some U.S. territories are eligible for EIDL loans if they have suffered economic injury directly as a result of the ongoing COVID-19 pandemic. EIDL's notably do not allow for loan forgiveness—unlike PPP loans. Borrowers with existing EIDL loans incurred because of the COVID-19 pandemic can refinance under these new terms. Employers may be eligible for loans under both EIDL and PPP. However, employers will be unable to seek economic recover under an EIDL loan for the same costs which are covered by a PPP loan.
ELIGIBILITY
EIDL eligibility has been expanded between January 31, 2020 and December 31, 2020 to include any business with fewer than 501 employees, any individual operating as a sole proprietorship or as an independent contractor, along with any cooperative, ESOP, or tribal small business concern with fewer than 501 employees. These applicants are also seemingly subject to SBA rules on affiliation, subject to additional forthcoming guidance from the SBA. All entities which were previously eligible for EIDL loans remain eligible under the most favorable terms authorized by the CARES Act.
Employers must have suffered a “substantial economic injury” caused by COVID-19 in order to qualify for EIDL loans. These are based upon the employer’s actual economic injury, as determined by the SBA (minus any recoveries, such as insurance proceeds), and is capped at $2 million. Employers can use EIDL loans for payroll and other costs, and also to cover increased expenses resulting from supply chain interruptions, paying obligations that cannot otherwise be met as a result of revenue loss, and for other uses. EIDL loan interest rates are fixed at 3.75% for small business and at 2.75% for non-profits. EIDL loans have up to a 30-year term and amortization.
ADVANCE PAYMENTS
CARES Act now allows applicants to request an advance sum of no more than $10,000 to pay allowable operational expenses. The SBA will pay these advances within 3 days. Bare bones, these advances are similar to a grant, to the extent that they do not need to be repaid — even if the loan application is ultimately denied. One caveat, however, is that any such advanced payment will be deducted from any sort of loan forgiveness under a PPP loan.
WAIVED REQUIREMENTS
The CARES Act does not require EIDL loans to have a personal guarantee if the principal amount is $200,000 or less. However, personal guarantees are required from owners with more than 20% ownership of the borrower for any loans in excess of that amount. CARES Act also waives the prior requirement for the borrower to show that it is “out of options” and that it cannot find credit from other sources. Without further guidance from the SBA, it seems as if the collateral requirement for loans in excess of $25,000 still applies. When processing an applicant’s application, the SBA must determine the applicant’s credit-worthiness. However, these applications can be approved based exclusively on the applicant’s credit score, or by other means of determining the applicant’s ability to repay the loan amount. This can be done without requiring the applicant to submit tax returns, thus greatly speeding up the approval processing time for EIDL during the covered period.
USE OF FUNDS
Unlike PPP Loans, employers can use EIDL loans to pay fixed debts; payroll expenses, accounts payable, as well as any other bills that may go unpaid as a result of the COVID-19 disaster. However, employers cannot use EIDL loan funds to refinance, expand the business, grow the business in any way, or or implement improvements to company infrastructure.
Ultimately, both the PPP and the EIDL loan programs offer very favorable terms for employers, in addition to potential loan forgiveness. Eligible small business employers who have seen their bottom lines dramatically impacted by the COVID-19 pandemic and global responses should certainly consider applying for one or both of these new types of expanded loans. EIDL loan applications are submitted directly through the SBA, while PPP loan applications will soon be available from lenders approved by the SBA.
We recommend acting as quickly as possible! It appears that the funds currently allocated for these programs will run out quickly — in perhaps as little as 1 month. If you feel the need, obtaining legal representation in this situation (whether from our firm or elsewhere) can help to avoid any common mistakes and ensure that your business can put together a sound strategy for weathering the current economic conditions.
Update March 31, 2020 at 11:06 PM: Updated to reflect newly issued SBA guidance on loan maturity, interest rate, and loan amounts.
Updated April 1, 2020 at 1:17 PM: The SBA has finalized the PPP loan application. All eligible applicants should speak with their lenders directly for a list of information the lender will need to process the application. We have also updated the article to comply with the Treasury Department’s new guidance on maximum loan amounts.
Updated April 3, 2020 at 9:18 AM: Updated to reflect additional eligibility guidance, the treatment of independent contractors, and the ability of agent representation and payment, pursuant to guidance issued by the SBA in 13 CFE Part 120 “Business Loan Program Temporary Changes; Paycheck Protection Program”